Building a Home: Should You Lock-In Your Mortgage Rate?

New homes sales have rose significantly in the past few months, but it looks like the numbers are based on signed contracts instead of closings. This means that some of these homes that are recorded as sold may have not even been built yet, and may never be. Contracts were signed with interest rates at record lows, buyers were unable to lock in the interest rates, and are now watching interest rates increase. This will probably result in a significant number of cancellations.

Why Lock-In Your Mortgage Rate

When locking-in interest rates, most home buyers try to find the best time to do it so they get the best deal. While interest rates cannot be accurately predicted, there are trends that you can keep your eye on in order to better approximate which way the rates are going.

If you decide against locking in your interest rate, and would like to wait, there is a chance that the rate might go down, but there’s also a chance that it might go up. Interest rates don’t normally increase significantly over a short period of time, but a lot can happen until closing, and you could end up with a much higher rate on your mortgage loan. Also, depending on your financial situation, even that really small increase in interest can make it much harder to keep up with mortgage payments over time.

Locking-in your mortgage interest rate will guarantee that the interest rate you and your lender agreed upon will be applied to your mortgage loan, regardless of the changes in mortgage rates that will happen until closing. What many borrowers don’t realize is that they are not tied to that particular lender if they lock-in their interest rate. If rates decrease before closing, the borrower can go to a different lender. The threat of losing a customer might even determine your current lender to renegotiate a lower interest rate.

If you are satisfied with the current mortgage rates today, you should lock it in. This will protect you against any future interest rate increases and give you more peace of mind than if you would choose to risk and not lock-in your mortgage rate.

Locking in the Mortgage Rate When Building a Home

On regular mortgage loans, the interest rate can be locked right after the application is approved. The closing will usually be one or two months later, so there won’t be any major changes in interest rates, unless something extreme happens with the United States or global economy.

Locking-in an interest rate on a home that is not built yet or currently being built is much harder because the lender will not know precisely when construction will end. Borrowers apply for a mortgage, but are only able to lock in their mortgage several months later. Interest rates can fluctuate significantly in several months, putting borrowers at a great risk of paying significantly more on their mortgages. In order to lock-in interest rates, you will most likely have to pay points on the mortgage, which can add up to thousands of dollars.

The conclusion is that you should lock-in your mortgage rate when building a home if you are satisfied with the interest rate that is offered to you. You might not be able to lock-in the rate unless you pay mortgage points, so you have to decide if you want to spend that money to lock-in the rate or invest it somewhere else. Locking-in the mortgage rate when building a home will give you peace of mind, but you should always look at all the factors before deciding whether you should do it or not.